MySQL - root access denied if not 127.0.0.1

Got a serious problem with our MySQL service a couple of days ago. You cannot login as root unless you type in "-h 127.0.0.1". I've searched and searched on the web and looked up so many things but still not getting it to work.

The things I've tried:

Checked that /etc/hosts points localhost to 127.0.0.1

Mysqld is running on port 3306 and with IPv4

The path to the mysql socket is correct both in my.cnf and debian.cnf

Checked that "bind adress" is uncommented

Getting really frustrated as ISPConfig is not able to make database changes!

This is a physical machine and just tried to reboot the mirrored server but still same problem..

If I'm correct "root@127.0.0.1" and "root@localhost" have different privileges but this can be solved by NOT using an options that I can't remember right now, but that option was turned off as default so localhost is automatically shown as 127.0.0.1 (or is it the other way around?).